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Theory of the Firm

Theory of the Firm. BY: Kimberly Lin Mehul Christian. What is Profit?. Revenue (total money earned) – Costs Opportunity Cost needs to be added to cost 2 Types of Profit: - Normal Profit -Abnormal ( Super-normal) Profit. A Sliding Scale…. Monopolistic Competition.

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Theory of the Firm

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  1. Theory of the Firm BY: Kimberly Lin Mehul Christian

  2. What is Profit? • Revenue (total money earned) – Costs • Opportunity Cost needs to be added to cost • 2 Types of Profit: - Normal Profit -Abnormal ( Super-normal) Profit

  3. A Sliding Scale… Monopolistic Competition Perfect Competition Oligopoly Monopoly Number of firms INCREASE

  4. Monopoly • Only one firm controls the market • Monopoly is identified by the percentage of stocks they have in the industry • Barriers to entry: - Patents, International trade restrictions • Governments try to limit the power of monopolists • The firm have no competition, and have the control over the price

  5. Oligopoly • Approximately 2 firms in a single market • Microsoft & Apple, Coke and Pepsi • Interdependence • Collusion could happen

  6. Monopolistic Competition • Firms in an industry with distinct products of their own, but have similar functions • No barriers of entry • Lessens price competition

  7. Perfect Competition • There are many small firms in the market • Identical products are sold by all firms • Perfect knowledge of prices and technology • There are no barriers of entry • There is lots of competition • Leads to “normal profit” in the long run • Doesn’t really exist in the real world

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